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CAT 2006-04 - Commercial Activity Tax Cash Discounts, Defined - Issued April, 2006

This is a draft rule to clarify that cash discounts are to be excluded from a taxpayer’s gross receipts in calculating its commercial activity tax (CAT) liability. Prior to adopting a rule clarifying rebates and discounts, the Ohio Department of Taxation (ODT) is seeking public comment on the draft of that rule. Public comment on this rule should be made to Leslie Akers by e-mail at Leslie_Akers@tax.state.oh.us or by calling her at (614) 644-6896. Please direct any questions you may have to the Commercial Activity Tax Division of ODT at 1-888-722-8829.

Please make any comments directly related to this proposed rule by the end of the business day on April 21, 2006.

Reason for rule. The Tax Commissioner is promulgating this rule in order to clarify that certain rebates and discounts may be excluded from a taxpayer’s calculation of its gross receipts for purposes of the commercial activity tax.

Draft of Rule 5703-29-14 Cash discounts, defined.

(A)(1) For purposes of the commercial activity tax, “cash discounts” (i.e. reductions in gross revenue) are deducted from a taxpayer’s “gross receipts” pursuant to division (F)(4)(a) of section 5751.01 of the Revised Code.

(2) For purposes of this rule, “cash discounts” include the following provided they are only based on making timely payments or volume purchases:

(a) “x per cent, y-day” discounts, where the purchaser may take a percentage cash discount on the invoice price if payment is made within a specified period of time of the invoice date; otherwise the entire invoice price is due by the net date;

(b) Incentive-based rebates received by a purchaser, but not the purchaser’s customer; and

(c) Discounts allowed and taken by a purchaser, but not the purchaser’s customer.

(B)(1) For example, an Ohio retailer purchases its products from the manufacturer and receives an invoice with a two-ten, net-thirty cash discount option. If the retailer pays the invoice within ten days of the invoice date, the retailer may deduct the invoice price by two per cent and the manufacturer would report the ninety-eight per cent of the invoiced price that it received from the retailer as taxable gross receipts. If the retailer fails to pay the invoice within ten days, the entire invoice amount is due within thirty days of the invoice date and the manufacturer would report the one hundred per cent of the invoiced price that it received from the retailer as taxable gross receipts.

(2)(a) As another example, for promotional purposes and in order to boost its sales, a car manufacturer announces that it will provide a rebate of one thousand dollars per “Model A” car to all dealers that sell at least one hundred “Model A” cars in a given quarter. A car dealer located in Columbus, Ohio sells two hundred “Model A” cars in the first quarter of 2006. In accordance with its incentive program, the manufacturer sends the dealer a check for twenty thousand dollars. The twenty thousand dollar rebate does not have to be included in the dealer’s gross receipts for purposes of the commercial activity tax and the manufacturer can reduce its gross receipts by such amount as a deduction.

(b) In contrast, assume a manufacturer provides a rebate to the car dealer’s customers and that the customer, whether required to or not, signs the rebate over to the car dealer. This rebate may not be deducted by the manufacturer or the car dealer as a cash discount, as such rebate was paid to the purchaser’s customer and not to the purchaser.

(3)(a) As another example, a hardware store accepts a manufacturer’s coupon for a one dollar discount of two boxes of “X Brand” nails. The hardware store remits the coupon to “X Brand” manufacturer and “X Brand” reimburses the hardware store the one dollar discount taken, plus the eight-cent handling fee. When the hardware store receives the one dollar and eight cent rebate from the manufacturer, it must include that amount in its gross receipts for purposes of the commercial activity tax. “X Brand” manufacturer may not claim any reduction (i.e. deduction) from its gross receipts for such reimbursement because the reimbursement goes to the retailer that accepted a coupon from its customer and not a reimbursement directly to the retailer.  It is also not a reimbursement to the purchaser based on timely payment or volume purchases. 

(b) Assume, however, that the Ohio hardware store advertises a one dollar discount on two boxes of “X Brand” nails, and provides a store coupon. When the customer purchases the nails and is given a one dollar discount, the hardware store is not required to include that one dollar in its calculation of gross receipts for purposes of the commercial activity tax.

(4) As another example, assume a discount store receives a monthly shelving allowance from certain manufacturers for displaying the manufacturer’s products in a prime location in the discount store. The discount store is required to include this allowance in its calculation of gross receipts for purposes of the commercial activity tax.

(5) As another example, a fast food franchise receives a flat fee or a variable fee based on the number of products sold (e.g., hamburgers sold) for providing local advertising. The franchise may not exclude this type of fee from its calculation of gross receipts because such reimbursement is for an expense and is not based on making timely payments or on volume purchases.